The consumption conundrum

– There is one set of numbers that everyone in the retail/consumer sector is watching closely at the moment: incomes. With consumption growth rates generally softening by a point or two (and sometimes more) the key to the future will be continued wage growth. Rising wages among the urban middle class – which have come by virtue of increased productivity – are responsible for the strong consumption of the last few years. If that number starts to falter, and indications are that it is flattening in some key job sectors, then consumption could slump.

– Retail consumption gains tends to follow investment, with a lag of between nine and 12 months. When investment goes into an area, retail sales soon pick up – and vice versa. If wage growth slows and people start concentrating on saving and essential payments, discretionary spending will fall.

– Of course the government has any number of policy levers it can pull to boost consumption. China may need a strong global economy to grow at 12% a year, but can grow at 9% comfortably relying on its own domestic momentum. The next few months will be interesting as we wait to see which levers they pull – for example, banks could be freed to expand credit, taxes could be reduced on low earners, the minimum deposit for mortgages could be revised downwards and so on. Those at the premium end of the market would like to see luxury taxes and import taxes reduced, but this is unlikely – it’s mass-market stimulation that will be most important.

– China now has a Marks & Spencer store – the eponymous M&S is now open for business on Shanghai’s Nanjing Lu. At just under 5,000sqm the store is one of their largest outside the UK. It’s good to see that, unlike just about any other foreign retailer, M&S has instituted its environmental program (called Plan A – because there is, apparently, no plan B) from the start. Too many foreign retailers put this off until later and then either only partially do it or don’t bother at all.

– It’s incredibly hard to determine the exact number of factories that have either gone bankrupt or cut and run in the last few months. China’s complicated shut-down procedures mean many people decide the cheapest option is simply to turn the lights out, close the door and walk away. Many of these manufacturers know that Asia has no shortage of low-cost labor coming on. Demographics are not a nation’s destiny as some say, but consider that when China’s population officially hits 1.5 billion, India will be roughly as populous and Southeast Asia, North Korea, South Asia (ex-India) and Indochina will have a combined population of 1.1 billon people.

– It seems Shanghai is finding it harder to bounce back than Beijing after the Olympics-induced visa crackdown and general discouragement of business and non-Olympics tourism. In September many five-star hotels in the city were, quietly, admitting they had occupancy rates under 50%, with no bounce-back occurring. Given that hospitality industry analysts see 63% occupancy as the break-even point for hotels, plenty of high-end establishments are still hurting even though the fuwa have disappeared from the shelves.

– What’s left to say about the Sanlu milk scandal that hasn’t been mentioned? Inadequate testing, a slow response to a crisis by the company and its foreign partner – most aspects have been well-covered. I was interested to note in conversation with several supermarket chains that sales of imported products have boomed since the scandal broke. Staff have also been questioned about the origins of products as consumers realize that a foreign brand name doesn’t necessarily mean it is imported. Manufacturing locally will have its downside for a while as imports sell to a sizeable group of concerned consumers.

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